Loan modification offer - too good to be true?
Long-time lurker here with a question for the smart folks on this forum.
I have lots of equity in my house, am considering selling with the next couple of years, but would prefer to keep the house. I am comfortable with my current interest-only loan. The median price of houses sold in my town in May is around $1.4 million - it's a very strong real estate market and has not been affected by the subprime and Alt-A disasters, although it has been affected by the jumbo mortgage loan freeze-up. I'm aware that the numbers I'm throwing around are way out of whack with most of the country, but please bear with me :-)
In the past couple of months I've received 2 offers from my current lender to modify my loan. My current loan is a 5/1 interest-only ARM scheduled to reset on 1/2012. Principal is a little over $1 million, interest rate is 5.5%, current interest-only payment is $5000/month. The index is the 1-year LIBOR, with the new interest rate (in 2012) to be LIBOR + 2.25%, not to exceed an increase of 2% each year (so the maximum possible interest rate in 2012 would be 7.5%). The LIBOR is currently around 1.2%, so if the loan were reset today the rate would be 3.45%.
The first offer was to convert from the current 5/1 interest-only ARM to a 27-year fixed at 6%, which increased my monthly payments to $6600 or so (if I remember correctly). I declined.
The offer I received today is to convert to a new 5/1 interest-only ARM at 4.375%, which gives me monthly payments of $3981 (their calculation). The reset date would be 7/1/2015, rate to be based on LIBOR + 2.25%. So basically this would push out my reset date and save me $1,000 in interest per month.
From the document I understand that on 7/1/2015 the loan converts to a fully-amortizing loan at LIBOR + 2.25%, to be adjusted every year with the adjustment not to exceed +/- 2%.
What I don't see anywhere in this document is the length of the term. It just says "the date of borrower's first payment consisting of both principal and interest shall be that date provided for in the Note and Security Instrument and is not being modified herein". Right now, under the terms of my current loan, I'd begin paying principal and interest on 1/2012.
Does this mean I'd pay principal and interest at the teaser rate of 4.375% on 1/2012, rather than having a "true" 5-year interest-only loan? The fully-amortized payment would be about $6000/month at 4.375% for a 25-year term.
To call this a 5/1 ARM is confusing, if it becomes fully amortizing after only 18 months. Even so, I'd be saving $1000/month in those 18 months, so it seems like it's worth doing. I either pay LIBOR + 2.25% on 1/2012 or 4.375% on 1/2012, so I guess the opportunity cost is that if the LIBOR stays low for the next 18 months, I'd be paying a higher rate (4.375%) than I otherwise would (3.45% or so).
What am I missing here, and is this an offer that would be worth considering?